Ground rent

As a legal term, ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior Leaseholder, as required under a lease. In this sense, a ground rent is created when a freehold piece of land is sold on a long lease or leases.^[1] The ground rent provides an income for the landowner.^[2] In economics, ground rent is a form of economic rent meaning all value accruing to titleholders as a result of the exclusive ownership of title privilege to location.^[3][4]

History

In Roman law, ground rent (solarium) was an annual rent payable by the lessee of a superficies (a piece of land), or perpetual lease of building land. In early Norman England, tenants could lease their title to land so that the land-owning lords did not have any power over the sub-tenant to collect taxes. In 1290 King Edward I passed the Statute of Quia Emptores that prevented tenants from leasing their lands to others through subinfeudation. This created a system of substitution, where the tenant's full interest would be transferred to the purchaser or donee, who would pay a rentcharge. This system later passed into common law in England and was adopted by many nations which trace their legal heritage to Britain.

Classical economists and Georgists quantify ground rent to investigate and capture unearned income called Economic rent, as distinct from labor-made income.^[5]

Valuation

The value of the freehold interest comprises:

• A multiple of the current annual ground rent payable, which will depend on
  • the outstanding term of the lease
  • any future scheduled increases in the level of ground rent
  • market interest rates
  • the probability of default
  • if the rents for individual flats etc. are small, the cost of collection
• The net present value of the reversion, i.e. at the end of the lease the freeholder (to whom the rent is paid) will probably be fully entitled to the property, so the shorter the lease the greater the reversion value.
• Any attributable "marriage value" (a substantial sum designed to compensate freeholders for their loss of interest when a lease with less than 80 years to run is extended).

In economics, ground rent means all economic value accruing to owners of land, regardless of whether payments are explicitly made or the rents are imputed. Various assessment methodologies are employed by real estate appraisers.^[6]

United Kingdom

In the United Kingdom, the rights of residential tenants of property subject to a long lease at a ground rent are governed by the Leasehold Reform Act 1967 for houses and the Leasehold Reform, Housing and Urban Development Act 1993 for flats.

England and Wales

In English law, it appears that the term "ground rent" was at one time popularly used for the houses and lands out of which ground rents issue, as well as for the rents themselves.^[7] Lord Eldon observed in 1815 that the context in which the term occurred may materially vary its meaning.^[8]

The contemporary accepted meaning of ground rent is the rent at which land is let for the purpose of improvement by building: i.e. a rent charged in respect of the land only, and not in respect of the buildings to be placed thereon. It is therefore usually lower than the rent that might be achieved for a building let on the open market, and is let for a longer term — at least 21 years, but more commonly 99 years, 125 years, or even 999 years. However, inflation has eroded the value of most ground rents with long leases and non-rising incomes, so their value is often now small where there is no prospect of a reversion (when the ownership of the property reverts to the freeholder) within say 150 years.

The Commonhold and Leasehold Reform Act 2002 and the The Landlord and Tenant (Notice of Rent) (England) Regulations 2004 now govern the form of notice that needs to be issued to collect ground rent.^[9] Previously there had been a problem with some landlords sending confusing or dishonest demands for payments to tenants.

Under the terms of a lease agreement, the freeholder (the outright owner of the land or property) grants permission for a leaseholder to take ownership of the property for a specified period of time. This could range from 21 years to 999 years and during this time the leaseholder will pay ground rent to the freeholder. Freeholders lease property primarily for the initial premium paid by the original leaseholder for granting the lease; but in addition ground rent (often a token amount) will be payable over a long term, and this may be an attractive fixed income investment for some types of investor.^[10] The final sanction available to a landlord faced with a leaseholder in breach of the lease due to the failure to pay the service charges, ground rent or administration charges, is to forfeit the lease and to repossess the house or flat. To do this the landlord must first serve a valid notice under section 146 of the Law of Property Act 1925 - the Notice of Seeking Possession. However, the landlord cannot serve a section 146 notice where the amount of service charges, administration charges or ground rent owed (or a combination of all of these) unless the unpaid amount is more than £350 or consists of, or includes, an amount that has been outstanding for more than three years.^[11]

There are a number of companies which specialise in buying ground rents for long term investment from landlords who want to sell their ground rents. Normally they focus on purchasing reversionary ground rents, either for initial income or for the opportunity of a reversion of the underlying property at some point in the future. The value of ground rents is affected by the rent review pattern on future income increases, the value of the underlying property, the unexpired lease length and whether marriage value is applicable.^[12][13]

Prior to selling ground rents there is a statutory obligation incumbent on both parties that Section V notices are served on the long leaseholders. This gives them a two-month period within which to respond. Upon expiry of the notice, a transaction can proceed at the price stated on the notice or higher (but not lower) for up to 12 months subsequently. The only way this can be avoided is for exchange of contracts on the sale of the ground rent of flats to have taken place prior to 50% of the flats being sold. This then allows completion upon sale of the last flats without the need for Section V notices.

Scotland

In Scots law, the term ground rent is not employed, but its place is taken, for practical purposes, by the ground annual, which bears a double meaning:

• At the time of the Reformation in Scotland, the lands of the Church were parcelled out by the crown into various lordships, the grantees being called "Lords of Erection". In the 17th century these Lords of Erection resigned their superiorities to the crown, with the exception of the feu-duties, which were to be retained till a price agreed upon for their redemption had been paid. This reserved power of redemption was, however, resigned by the crown on the eve of the Union and the feu-duties became payable in perpetuity to the Lords of Erection as a ground annual.
• Speculators in building ground usually grant sub-feus to builders at a high feu-duty. But where sub-feus are prohibited — they might have been prior to the Conveyancing (Scotland) Act 1874 — and there is much demand for building ground, the feuars frequently stipulate that the builder pay an annual rent rather than purchase the land outright. This annual rent is called a ground annual. Interest is not due on arrears of ground annuals and, like other real burdens, ground annuals may now be freely assigned and conveyed.

Feu duty in Scotland was ended by the Abolition of Feudal Tenure etc. (Scotland) Act 2000.

Northern Ireland

Redemption of ground rents in Northern Ireland is covered by the Ground Rents Act (Northern Ireland) 2001.^[14]

Republic of Ireland

In the Republic of Ireland ground rents have been a feature of urban life. While most tenancy reform legislation has been enacted for agricultural land (see Irish Land Acts), urban occupiers / tenants have been allowed to "buy out" their ground rents from landlords, and so effectively change a long lease into a freehold interest, most recently under Acts of 1978^[15] and 2005.^[16] Notably, ground rents in Castlebar, County Mayo have been withheld following the controversial disappearance of Lord Lucan in 1974.^[17]

United States of America

The term ground rent is applied in many U.S. states to a kind of tenure created by a grant in fee simple, the grantor reserving to himself and his heirs a certain rent, which is the interest in the money value of the land.

Maryland

The State of Maryland maintains provisions for ground rents, primarily in the Baltimore area.^[18] The practice dates back to the seventeenth century,^[19] when lessorlords and serfs paid crops and livestock to feudal lords to rent the lord's land.^[20] With ground rent, homeowners only own the building itself, but they must pay a small amount to rent the land itself from its owner.^[20] Under Maryland law, if ground rent is not paid on time, the ground owner can go to court and have a lien placed against the house, effectively seizing the home from the homeowner over a relatively small amount due,^[18] sometimes as little as $24.^[21] This occurred almost 4,000 times in Baltimore City from 2000 to 2005.^[22] In addition, properties with ground rent are usually valued about $10,000 less than comparable properties without ground rent.^[20]

In 2007, an emergency bill was presented by Democratic Maryland Governor Martin O'Malley to completely ban new ground rents^[23] and prevent ground owners from seizing houses from delinquent homeowners.^[24] The bill was passed by the legislature,^[18] Maryland state law required all ground owners to register the ownership of the land with the state by September 2008 or else the ground ownership is automatically extinguished.^[25] As of 2008, there were about 85,000 in Maryland.^[25] The new laws were contested in court for some ground owners, who called it an unconstitutional taking of property without fair compensation.^[21][26] In 2011, the law was upheld by the court, as an appropriate use of the state's authority to regulate private property.^[27]

Pennsylvania

Ground rents in the Commonwealth of Pennsylvania are considered real estate and, in cases of intestacy, go to the heir. They are rent services and not rent charges, the statute Quia Emptores never having been in force in Pennsylvania, and are subject to all the incidents of such rents. The grantee of a ground rent may mortgage, sell, or otherwise dispose of the grant as he pleases and while the rent is paid the land cannot be sold or the value of the improvements lost. The person who owns the land can live on it or they can build a home on it that is sold to other people, while they retain ownership of the land and charge the new home owner ground rent.

A ground rent being a freehold estate, created by deed and perpetual in duration, no presumption that it had been released could, at common law, arise from lapse of time. However, by statute (Act of 27 April 1855, s. 7), a presumption of release or extinguishment is created where no payment, claim or demand has been made for the rent, nor any declaration or acknowledgment of its existence made or given by the owner of the premises subject to it, for the period of 21 years. Ground rents were formerly irredeemable after a certain time but the creation of irredeemable ground rents is now forbidden (Pennsylvania Act 7 Assembly, 22 April 1850).

Virginia

In the Commonwealth of Virginia, ground rents are allowable for residential purposes and are considered effective whether or not title of the land has been transferred to the user.^[28] The amount of ground rents may be changed by either party once every 5 years, however the amount of such changes is required to be no more than the increase in the Consumer Price Index.^[29] Ground rents are considered liens in Virginia,^[30] and the terms of the ground rent agreement may be incorporated into the deed or other instrument of transfer according to proscribed guidelines.^[31]

References

 This article incorporates text from a publication now in the public domain: Chisholm, Hugh, ed. (1911). Encyclopædia Britannica (11th ed.). Cambridge University Press. 

External links

• UK Rentcharges Act 1977 at propertylawuk.net
• The Leasehold Advisory Service UK: Service charges and other issues
• Help with Services Charges, Administration Fees and Ground Rent
• "Ground Rents - An explanation" from Landlordzone
• "Primelocation Ground Rent Guide"
• Special Baltimore Sun Series on Ground Rent and Changes Prompted by the Series in Baltimore City
• Apportioning ground rents on leasehold houses